It wasn’t your fault, of course.
The COVID-19 pandemic that resulted in closures of many businesses hurt everyone, especially employees who depended on that paycheck to pay their rents and mortgages. The CARES Act stepped in to assure a moratorium on evictions and forbearance for those with mortgage payment responsibilities. Just as “of course,” forbearance didn’t mean anyone is off the hook for mortgage payments. It only meant that Lenders and Servicers needed to wait till the economic engines could sufficiently recover before they could collect from people who could not pay.
But the federal government announced in June that July 31, 2021 would be the “final” deadline for the end of forbearance after repeatedly extending that deadline. Despite protests up to and including July 31, Congress failed to act further, placing millions of people in financial and residential jeopardy, and compelling the White House to step forward. Roughly two-thirds of people in forbearance had already exited forbearance programs last March according to the New York Branch of the Federal Reserve. What about the rest? Has everyone recovered? Obviously not, and many of these will be left with the question of “Now what?” while feeling unease like the lurking presence of a tentacled financial monster slithering up from the murky depths.
A COOLING MARKET
During the height of the pandemic, the California housing market went into overdrive, with property prices being negotiated at far higher prices than most anticipated. This trend might have been compared to a volcanic fever, so much so that already greatly inflated San Francisco home prices soared to 35% over the previous year. Orange County’s fever broke the thermometer with the median sales price up a whopping 67% over this time in 2020.
But like all business cycles, what goes up eventually comes down and real estate is no exception. Many Buyers who were able to secure homes by paying prices beyond what Sellers asked have already closed their transactions. As more affluent and savvy Buyers bow out of competition after meeting their goals and more Sellers begin to appear, what remains is a cooling real estate market in Southern California as if to say, “We’re making a B-rated horror movie. What part do you want?”
It doesn’t mean the real estate market is in contraction now— far from it. But what that means is that a Seller cannot count on securing as high a return on property sold. That matters when forbearance has run out and those unable to take up mortgage payments again find themselves unable to pay. The course of action such people must take depends upon many factors such as:
(1) income,
(2) current mortgage amount,
(3) market value of the home,
(4) credit history,
(5) any California Homestead Exemption applicable (if declared),
(6) other liens and judgments,
(7) the loan program under which the mortgage falls, and
(8) budgeted expenditures.
Clearly, the end of forbearance is a time for careful assessment and decisive action where necessary.
HOW DIRE?
The urgency is a very real one and scavengers are salivating. Every week, a crowd gathers in front of the County Courthouse to auction off properties in Trustee Sales. Each potential Buyer calls into the phone number indicated on the Notice of Default and Election to Sell page to check whether a Lender or Servicer has placed any holds on selling a given property at such an auction. Is the Borrower the only one with access to this information?
Not on your life. Whether a hold may exist or not depends upon the Borrower’s actions or inaction. A Borrower who does nothing may find the Sheriff knocking on the door with an eviction notice sooner than he thinks.
Don’t let this happen to you.
It doesn’t need to happen because Lenders and Servicers dedicate entire departments to help their customers fulfil their mortgage obligations. If you find yourself in trouble, a Lender or Servicer will work with you as far as they legally can. They have plenty of incentive to do so, and the clock ticks as loudly for them as it does for you.
Any Borrower in such dire straits does well to not accept a Chapter 7 bankruptcy as a preferred option. Reasons to avoid this go far beyond damage to the Borrower’s credit history. If the mortgage property falls into the hands of the Bankruptcy Trustee, that Trustee can auction off the home to pay off the Lender, Servicer, and any other creditors. Chapter 7 is no shield against a mortgage. If you want to keep a home during a bankruptcy, keep making those monthly payments.
Chapter 13 bankruptcy is a reorganization. One doesn’t try to escape creditors in Chapter 13. So even in the case of Chapter 13, keep making those monthly payments.
But finances falling unsound call for weighing options without delay. Solving these matters, when a mortgage plays a role, is a highly nuanced art, one which really demands the help of a seasoned real estate professional. Here are some approaches you may consider. Discuss them with your real estate Broker to determine what’s best for you:
OPTION 1: REFINANCE
This is the safest option if you elect to stay in the home. If you’ve been in the home for a while, building up equity, you can pay off the mortgage in exchange for a smaller one with higher loan-to-value (LTV), translating into a lower interest rate. You don’t eliminate your mortgage entirely, and in terms of time, you “go back to square 1.” But in terms of your overall budget, you get greater flexibility, and metaphorically, more room to breathe.
Refinance is also advisable for newer Borrowers with adjustable mortgages. Adjustable rates fluctuate under market conditions and often come with balloon payment obligations that loom menacingly like an approaching Romulan warbird. If you’re in an adjustable mortgage, chances are, you’ll want to refinance and get into a fixed rate program while interest rates are still low.
In rare cases, a Borrower may opt for a negative amortized loan. These are only meant to be short term solutions. In a “neg-am” loan, you’re paying into the interest only and nothing on the principle. As a result, the loan actually gets larger over time. Why would anyone be crazy enough to accept such a loan? Simply this: consider the case of someone graduating soon from an advanced degree program with excellent prospects for a career in which income radically accelerates. A neg-am loan can work here, keeping an artificially low monthly payment to secure property. After money starts flowing like a gushing oil well, the Borrower refinances and works his way out of debt.
Of course, the refinance option works for people whose income may have diminished somewhat, but not eliminated.
OPTION 2: LOAN MODIFICATION
The Biden Administration recently announced new protective measures for some of these homeowners who have government loans (FHA, USDA, and VA), as well as some programs under Fannie Mae/Freddie Mac, in an effort to help them keep their homes and build equity for the long term. New enrollment for assistance has been extended to September 30. These mostly take the form of loan modifications that may include payment reductions.
Loan modifications are negotiated with the Lender or Servicer that may change the terms of an existing mortgage, change in the interest rate, change in the structure (i.e. from an adjustable to a fixed rate), or other forbearance. Since Lenders and Servicers had been compelled by law to enact forbearance during the most desperate days of the COVID-19 pandemic, few will be automatically inclined to forebear further. Changes made to a mortgage may be temporary or they may be permanent. But make no mistake: a loan modification won’t cancel a loan but stands as a repayment plan.
After all, no Lender or Servicer is required to accept a request for a loan modification. You must provide documentation showing evidence of continued hardship. Loan modification also negatively impacts one’s credit rating. One thing a loan modification may do is delay action on default but does not eliminate the threat thereof.
A Borrower must be careful selecting professionals who offer to negotiate loan modifications. Though some may tell you to stop making mortgage payments, this is very unwise. Some may suggest to send payments to another fund or ask you to sign over title to your home. These are scams. Some make promises and even demand an up-front fee, but none can guarantee acceptance of a loan modification. Legitimate professionals realize a benefit for themselves when you do. Never sign any contract you don’t clearly understand. Never ignore any notice a Lender or Servicer sends you.
In past years, Lenders and Servicers might proceed with a foreclosure process while considering foreclosure alternatives like loan modifications. This is called, “double tracking.” Sacramento outlawed this in 2012 with the Homeowner Bill of Rights. The law came with a sunset provision. Sunset provisions set an expiration date for a particular law. The 2012 Homeowner Bill of Rights expired, was then restored in 2016 till 2020. The current sunset date after passage of SB 1150 is January 1, 2025, meaning these provisions remain in place for all loans for now.
What the Homeowner Bill of Rights did was allow any Borrower to submit a complete application on a 1st mortgage at least 5 business days before a foreclosure sale, the Lender or Servicers may not record a notice of default or conduct a Trustee sale till it’s determined that:
(1) the borrower isn’t eligible and the appeal period has expired,
(2) the Borrower doesn’t accept the Lender’s or Servicer’s terms within 14 days, or
(3) the Borrower breaches the agreement or defaults on payments.
A “complete package” is more than just an application for loan modification. It must include all documentation to show hardship. Documentation consists of at least as much as required of a Borrower when first applying for the mortgage. A Lender or Servicer must provide a Borrower with a single point of contact. In other words, they cannot send you from one representative to another to another, each demanding to start from the beginning, leaving a virtual shell game for the Borrower. Not only is that not acceptable, but the Borrower may even sue the Lender or Servicer for bad faith.
OPTION 3: SELL OUTRIGHT
For some, especially for those with much equity, sale of a property will not only pay off the Lender or Servicer, but may provide adequate funds to start fresh without any impact upon your credit history whatsoever. It’s also advantageous if the funds are sufficient to allow an immediate purchase of another property in a less expensive area or for downsizing.
Though the current real estate market may be cooling, it’s far from stone cold. You can still get a good return on your investment, even if not quite as favorable as it may have this past spring.
SUB-OPTION 3a: SHORT SALE
Sometimes market conditions diminish property value such that its market worth falls below the amount of the mortgage, a condition sometimes described as “upside down on a mortgage.”. This can force a dangerous situation for the Borrower, but hazards exist for the Lender or Servicer as well. If one must sell the property, a short sale may be a favorable course for the Lender or Servicer.
In a short sale, the Lender or Servicer finds no alternative but to allow sale of a home, accepting the balance of the sale proceeds. The result is that the Lender or Servicer takes a loss. Why would they accept this?
Simply put, if the prospect of making a profit becomes impossible, the Lender or Servicer will seek to mitigate loss. Allowing a short sale is less costly than going through the process of foreclosure, especially when a Trustee sale won’t give them any better rate of return.
Short sales are not easy transactions to accomplish. In fact, the documentation involved in a short sale exceeds that of an initial loan application. Fulfilling a short sale requires daily attention on the part of a real estate Broker negotiating the short sale.
Short sales became quite common as a result of the Great Recession of 2008 when market values of Real Estate Investment Trusts (REIT) collapsed. This collapse translated into a corresponding collapse of market values at the local levels that took years to recover. Lenders were hit very hard during this period, especially those who chose to hold out, delaying closings of short sales by months. Many Lenders went out of business. Such conditions could happen again in future recessions and downturns in real estate market conditions.
OPTION 4: DEED IN LIEU OF FORECLOSURE
Others, especially if equity is slim to none, may voluntarily opt to convey the deed to the home in lieu of foreclosure. What this does is surrender the property to the Lender or Servicer in exchange for release of liability for mortgage payments.
A Lender or Servicer realizes several advantages. This exchange can be done relatively quickly and without a lot of fuss. The Lender or Servicer becomes the new owner, allowing an immediate sale to a new party. The time and expense of foreclosure can be avoided. On the other hand, if the Borrower is “upside-down” on a mortgage, or if the property has other liens or judgments against it, a Lender or Servicer might not accept a Deed in Lieu of Foreclosure. The Lender or Servicer may seek a deficiency judgment against the Borrower or negotiate the short sale route.
Deed in lieu of foreclosure is a highly negotiable action. In fact, a real estate Broker can offer a Borrower some other advantages like:
SUB-OPTION 4a: CASH FOR KEYS
Moving costs money. A Borrower may become so completely strapped financially that he’s unable to vacate the property in a timely manner. A Lender or Servicer may find it advantageous to pay the Borrower money to help him vacate the property when negotiating a Deed in Lieu of Foreclosure, a program called, “Cash for Keys.” In some cases, this can be a substantial amount, placing the Borrower into a position of being able to rent another living space. In a Cash for Keys agreement, the Borrower continues to maintain the property till the agreed-upon move-out date. The intention is to transfer property in such a condition that it can be resold quickly.
YOU NEED THE RIGHT HELP NOW
These descriptions only tell part of the story of what can be done to help you, the Borrower, through a financial crisis that may threaten like an apocalyptic doom. But such doom is far from certain, if you act quickly and have the right professional behind you.
Mariella Agrusa of iRealty Shop is exactly such a person. Not only is she a licensed real estate Broker with over 2 decades of broad experience, but is also registered in the Nationwide Multistate Licensing System (NMLS), registry that affirms her capabilities of handling the financial end of such transactions including short sales. She isn’t new to financial issues of real estate either. She served the federal Office of the Comptroller of the Currency during the Great Recession as a Quality Assurance Analyst reviewing mortgage Servicer compliance. If ever anyone understands the tricks of the financial trade, Mariella does. She’s more than a professional. She’s compassionate toward her clients, and has a reputation for getting results.
If you find yourself slipping into the abyss of financial uncertainty and desperation, call Mariella at iRealty Shop today. Don’t wait. Delays in action only deepen the trouble. Act quickly and proactively, and you may find yourself relieved of worry sooner than you think.
